Old age is inevitable for every human on this earth. Does this mean that it should be dependent on the kids? Can’t one live independently in this period of life? Absolutely, one can. To help the senior citizens in these times, the concept of “Reverse Mortgage Loan” has come into light. This article gives you insights about what this concept is.
What is a Reverse Mortgage Loan?
Simply put, a reverse mortgage loan is the opposite of home loan. This arrangement helps a senior citizen to get a regular stream of income from a lender (a bank or financial institution) against the mortgage of his home.
The borrower (pledger of the property), continues to live in the house till the end of his life and receives a periodic payment on it.
When a home is pledged, the lender arrives at its monetary worth based on demand for the property, current property prices, and the condition of the house.
Then the bank/financial institution disburses a loan amount to the borrowers periodically, lump sum or in the form of a committed credit line; after considering margin for interest costs and price fluctuations. The interest of an individual in the property declines with each and every payment received.
Why Reverse Mortgage Loans?
Senior citizens have several needs that cannot be fulfilled by their regular pension like existing bills or debts to be repaid, expensive prescribed medication, improving their home, planning for their grandchildren’s education, etc.
Also, because of the stage of their life, they cannot have any additional income. So,these loans help them to meet such needs and expenses, and make their living comfortable.
RBI’s Guidelines for Reverse Mortgage
- Maximum loan would of upto 60% of the assessed property value.
- The tenure of the loan would be ranging from 10-15 years. Though, some banks are offering a maximum tenure of 20 years.
- Option of annual, quarterly, monthly or lump sum loan payment.
- Property revaluation to be done by lender once every 5 years and if at such time, the valuation has increased, borrowers have the alternative of increasing the portion of the loan. In such a case, they are given the incremental amount in lump-sum
- The lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.
- The interest rates could either be fixed or variable determined by the prevailing market rates.
Features and Eligibility Criterias
- The house owner must be at least 60 years old. If spouse is a co-applicant, then she should be at least 58 years old.
- The property should be clear from encumbrances and should have clear title of the borrower.
- The property should be a self-acquired one, self-occupied residential house or flat, located in India.
- The life of property must be at least 20 years
- When the borrower outlives the tenure of the loan, payments will not be made but, the borrower can continue to occupy the property.
- Property should be the permanent primary residence of the individuals.
- No repayment is required as long as the borrower is alive. Borrower must pay all the taxes relating to the house and maintain the property as his primary residence.
Settlement of the Loan
- The loan will become due and payable only when the last surviving borrower dies or would like to sell the home permanently or he/she moves out permanently. On the death of the home owner, their legal heirs will be given an option of either to keep or sell the house; if they decide the latter, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs.
Benefits to the Senior Citizens
- A roof to live under and better access to health care
- Protection against inflation
- A supplement to retirement income
- No upper age limit to get benefits
- A non-recourse loan
- Tax-free payments from lenders
- Spouse can use property after death
A reverse mortgage is a classic option for senior citizens who need regular income,or if the property is of illiquid nature for some reason.
However, an important point to note is that at times, during the tenure of the loan, an elderly borrower may simply be physically incapable of maintaining the home as per loan requirements.
Although the loan contracts provide for foreclosure under such circumstances, this looks to be impractical and would result in litigation and bad publicity for the lender.
The implementation of reverse mortgage schemes at the macro level can reduce the burden of the government and employers paying pensions in public as well as private sector, and would incidentally bring in pension reforms. This schemes can bring about much-needed degree of regulation and transparency in the Indian market.